DROP IN OIL BOOSTS MARKET -- BIOTECHS AND SOFTWARE PULL QQQ OVER 200-DAY LINE -- CHECK POINT AND MEDIMMUNE ARE STANDOUTS -- DOW SCORES UPSIDE REVERSAL
OIL SERVICE HOLDERS ARE WEAKEST GROUP ... The rotation out of energy stocks that started last week is continuing. Energy was the day's weakest sector. Oil service was energy's weakest group. Chart 1 shows the Oil Service Holders backing off from new resistance at its (green) 20-day moving average. The big red volume bars last week and again today betray heavy downside volume. The relative strength line has also started to drop over the last week. All of which seem to confirm that the energy sector has peaked for now. This morning I wrote about a negative divergence between falling energy shares and higher crude. By day's end, crude oil had fallen $1.26 after hitting a new record this morning. That has the look of a downside reversal day. What's bad for oil is usually good for the market.
Chart 1
MEDIMMUNE LEADS BIOTECHS HIGHER... Biotechs were one of the day's strongest groups (second only to software which I wrote about this morning). Most of the credit goes to Medimmune. Its chart is pretty impressive both on an absolute and relative basis. The stock has broken out to the highest level for the year. Upside volume has also been impressive. Its relative strength line (plotted against the S&P 500) has broken out to the upside as well. MEDI helped the Biotech Index gain more than 2% today which in turn helped lead the Nasdaq higher. Chart 3 shows that biotechs have been one of the market's strongest groups since August. Today's strong bounce suggests that the biotech pullback may be over.
Chart 2
Chart 3
CHECK POINT IS BIGGEST QQQ WINNER ... Earlier today I wrote about stocks like Microsoft that were leading the software group higher. It turns that another software stock was the biggest percentage gainer in the Nasdaq 100 Index. Check Point Software Technologies gapped up to a three month high on monster volume. Its relative strength line jumped as well, which turned the stock from a Nasdaq laggard to a leader. The ability of the stock to rise above its July gap area (see box) is another positive sign. A decisive close over its 200-day average would be another one. Adobe, Computer Associates, Microsoft, and Oracle also helped make the Software Holders the day's strongest group. Chart 5 shows the software ETF bouncing impressively off its 200-day average. Its relative strength line has already hit a four-month high versus the Nasdaq 100 Index. Chart 6 shows the IIX Internet Index in a similar leadership role.
Chart 4
Chart 5
Chart 6
NASDAQ 100 CLOSES OVER 200-DAY LINE... Rotation-wise it was a good market day. That's because energy weakness, coupled with technology leadership, is usually a good combination for the market. The strongest index for the day was the Nasdaq 100 Shares which closed back over its 200-day average. Its relative strength line, which bottomed during August, hit a new four-month high versus the S&P 500. Nasdaq leadership is usually a necessary ingredient in any market rally. Combined with energy weakness, it can be a "very" good combination. The other stock indexes bounced as well. The S&P 500 SPDRs bounced off the late September low. The Dow Diamonds, which are close to chart support at their August low, achieved an upside reversal day on heavy volume. Its 9-day RSI line is also started to rise from oversold territory near 30. All in all, a very encouraging day. With October more than half over, seasonal trends should start turning more friendly through the balance of the year.
Chart 7
Chart 8
Chart 9
